Erik: Joining me now is Mike Green, chief strategist and portfolio manager for Simplify Asset Management. Mike, it's great to have you back on the show. It's been way too long.
Mike: Aw Thanks Erik. It has been too long.
Erik: I told our listeners when I interviewed Dr. Pippa Malmgren that long before I interviewed Pippa, a couple of different very senior people who I respect a lot had told me, quote, World War III has already begun. And Mike I want to now bring you out of the closet as the first guy who said that to me and what you actually told me I think a year ago now was you said, World War III began a full year ago. So that would be two years ago now at this point. Something that I realized, I didn't really take that seriously at first. And the reason is, for me personally those three words World War III equate directly to certain nuclear Armageddon that ends humanity forever. And I thought that was too extreme of a conclusion to come to. And I was a little bit surprised by it. After reading Dr. Pippa Malmgren's piece on what she meant by World War III has already become, she's not talking about nuclear Armageddon, she's talking about a whole new kind of warfare that is fought primarily on digital battlefields. And it really is the nuclear superpowers at war with one another. But she doesn't think that it's necessarily headed toward that nuclear Armageddon scenario. So let's start by clarifying what precisely did you mean when you said to me a year ago, that World War III had begun a year earlier than that?
Mike: What I meant by that was that we had entered into a period of great power competition, and that we were going to see the world begin to fracture. And unfortunately, that seems certainly more true today than it was back then I would argue, in many ways, the Trump tariffs on China were kind of the slap in the face that opened up this whole idea of, we're actually going to begin to compete quite overtly. I think the odd thing about what happened under the Trump administration was that Trump himself was very uncomfortable pushing forward a narrative that might harm the stock market right or might harm his popularity. So there is this weird dynamic where within the administration I was hearing a very clear change in tone and recognition that we had entered into overt competition, particularly with the Chinese, to a lesser extent with the Russians. And I would suggest that it doesn't have to mean Global Thermonuclear War, right? This can be a limited engagement, but it absolutely is involving a whole globe competition that is similar to, you know, the Napoleonic Wars of the 19th century and the 17th century to a lesser extent, the competition between France and Great Britain that manifested itself in the French-Indian wars to turn that into the first global dynamic, etc. This time around, it began in the trade trenches. But long before that, it was already happening, as you note in digital cyberspace, where China was basically doing everything that they could to steal every critical technology, and propel themselves forward in a, you know, a very fast moving way.
The irony is that this is actually very similar to the way that World War II develops, right, it doesn't start as a giant global conflict. It begins as a series of effectively border skirmishes. Right. And, you know, I find it a great irony that we're seeing the exact same type of dynamics that occurred at the start of that kind of 1937 to 1939 transition where it became clear that we were re-entering World War II. The armament had already been started. The US government and the UK Government were actively working to get their multinational corporations to withdraw involvement from places like Germany and Russia. You know, you saw the US suspend diplomatic relations with Russia in the beginning part of 1937 as Stalin had consolidated control and it became clear the extent of their spying operations against the United States. You know, this just feels it feels the exact same way, right? Now does it go kinetic nuclear? Man, that's, uh, you know, that's the bad outcome, right? But it does very much feel that the world is fracturing and fracturing for many of the same reasons. The global superpower has had to pull back, right? It is not playing the role of global policeman and as we see in US cities all over the place, when you reduce police enforcement, crime spikes, and some form of loss of Law and Order is what's happening around the globe right now.
Erik: Mike, when you told me this information about a year ago, it was in connection with an interview we were doing at the time, but you opted not to go public with that view at that time was that just because you were afraid it was so radical that it was going to cause people to dismiss you as a nutcase? Or why is it that you were hesitant to go on record, even though you were so emphatic and telling me on the phone that you thought World War III had already begun?
Mike: Well, I think the question always becomes, why does it matter? Right. So to the extent that you make an observation that hey, I think our neighbors are going to sell their house, you know, you don't take out a giant advertisement to say this, you say it to your friends. There wasn't particular relevance associated with this other than for me, it was a part of the exploration those who listened to my early Grant Williams and Bill Fleckenstein podcast. Remember I said, you know, as it related to the Coronavirus that there's something else going on, right, the level of incompetence, the level of control, seizure, etc. That was underway was clearly indicative that there was something else and I would just broadly argue that that this is that something else? Right, we're seeing all the behaviors that had been given a trial run in the early stages of the Coronavirus have now been amped up, right? So look at what's happening with China. Look at what's happening to social control features in Russia. The propaganda dynamics that, you know, we've worked awfully hard to get very good at American citizens are on the receiving end of that for the first time in a war that we're not propagating. Right.
So, you know, this is not us getting cool videos from the bombing of Iraq and general Stormin’ Norman Schwarzkopf showing us the luckiest man in Iraq because he barely escapes a bridge being blown up behind him as he drives over it, right. That was entertainment in a lot of ways, even though people were dying. This is far more complex. You know, this, we're very much in this intense debate where two countries Russia and Ukraine, neither of which are particularly well thought of in normal times. You know, one has been transformed into, you know, the bastion of of lightened freedom in the world. And the other one has been turned into a caricature of evil incarnate. You know, it's a very different experience today, versus trying to throw that out there a year ago, when, you know, candidly, you ran a very real risk of being interpreted as saying one of two things. Either you thought that China had intentionally released the virus, and therefore that was the first step in the process, and you are some tinfoil hat wearing entity, or that you were, you know, trying to engage in some form of, you know, shock value in an environment in which there was far too much shock already going around.
And the last thing I would just point out is that, you know, people have to recognize that while we're always trying to dig down and identify the truth of what's going on. If I go back a year ago, I'm not sure that it's particularly helpful to begin focusing on this idea of the World War III dynamic in an environment in which markets are broadly bullish, right, you're not trying to scare people out of the markets. And exactly as you pointed out, if I start bringing up the concept of thermonuclear war, that seems particularly unhelpful from an investment framework.
Erik: Now, the biggest mistake that people tend to make, both in war and in investing is to try to fight the last battle at the next battle. So I'm assuming if we think about how to be prepared as investors for this World War III environment. It's not about expecting everybody to hoard rubber to make aircraft tires with which was the really big thing during World War II, what is it about? Is it going to be about energy scarcity, or what?
Mike: Well, I think you're seeing two very important dynamics. And, you know, you're obviously extraordinarily familiar with the work of Peter de Haan etc. You know, there is a very clear competition for control. And you've heard me use this language before for control of what I refer to or what is broadly referred to as the World Island. Right. So the continent of Eurasia sits at the center of this conflict in the same way that it's at the center of the last conflict. In terms of World War II and most wars tend to be fought around this dynamic, right? There's effectively a Nash equilibrium where the European Peninsula, Russia, the Middle East, India, and China are always in competition for control of this world Island. Russia made a move to try to reinforce in its words, its defenses try to build back up the barriers that Peter de Haan identifies and kind of true to form if we're actually in this World War II, World War III type framework, I would argue one of the most important things that happened is the speed of the Western response, right. This betrays that we were prepared for this. It doesn't feel like it. But policy choices were made in a matter of days and weeks that normally, you know, would take forever. I did not anticipate the speed of the response. And to me if anything that just reinforces how seriously Western governments are taking this new narrative.
Erik: Let's talk about what some of the themes would be for how a World War III would be fought in contrast to how World War II was fought. One of the things that it seems like Pippa Malmgren emphasized was that it would be on digital battlefields that we'd be looking at more examples of, you know, one sovereign hacking another sovereigns systems and, you know, breaking their nuclear capability by hacking the controllers that run their centrifuges as opposed to dropping bombs on those same facilities. I have held the view myself that I think Western governments have been extremely slow to recognize how incredibly important digital currency is really going to be. And I think that Russia and China are both working very aggressively on trying to one up the west by beating them to some kind of sovereign digital currency system that could potentially compete with the US dollar, or could be designed for the purpose of competing with the US dollar for the title of global reserve currency. Those are a couple of thoughts off the top of my head, am I on the right track? And if I'm not what things should I be thinking about in terms of what's coming?
Mike: Well, you used a really important phrase where you said, you know, we always fight the last war, right? So the Maginot Line is designed to prevent the incursion across, you know, the lines of attack that existed in World War I. This time around, like, you know, the Navy, for example, is actually trying to tell us in the United States that they don't want battleships and they don't want aircraft carriers. And politicians are saying, how could you possibly talk about reducing the size of the force, right? The military is telling us that that type of heavy equipment, and we're seeing this very much in Russia, you know, it is extraordinarily vulnerable to the new weapons technologies, the offensive weapons technologies, like hypersonic missiles, like Poseidon missiles, etc. You know, it's remarkable when you think about the idea that the US would dramatically expand its physical Navy as compared to unmanned drones, hypersonic subs, etc. After watching what just transpired with, you know, the flagship of the Russian fleet and in the Black Sea, right, this is, that's a big deal. When you see a ship like that go down. You know, it's not dissimilar to the dynamics of the German U-boats in World War I, there is a change of technology. That means that the historical tools are remarkably vulnerable.
Now, this is where I think I may differ from Pippa is what that means is, is that you're going to see low kinetic, you know, theoretically plausible deniability around attacks, right? So I can engage in ransomware attacks or attacks on industrial facilities or communication networks, etc. And I can always say, well, where's your evidence, right? The vast majority of people aren't going to see it the same way. And they aren't going to treat it the same way. But eventually, you start developing the new technologies that have to ultimately reinforce this. So if it continues, I think like almost every conflict, we will eventually see physical force. We're seeing an extreme version of that in Ukraine right now. If we get pulled in is, you know, in terms of a direct conflict is uncertain at this point. But it certainly feels increasingly likely the Biden administration appears very willing to ultimately commit much more aggressively to the defense of Ukrainian than we've done so far.
Erik: Mike, let's go deeper on that subject. Because something that I've noticed, and I have been horrified by is both President Biden and particularly I forget the specific name of a Senator who on television said, we should not rule out the use of first use nuclear strikes against Russia because of this Ukraine situation. Now, President Barack Obama, I think very astutely said that Ukraine is absolutely essential to Russia's interests, but is of almost no consequence to the United States interest. Therefore, it would be foolish of the United States to ever make Ukraine a big priority or to get into a big battle over Ukraine. Obviously, President Biden has a different philosophy, the guy who went on television and said we ought to be considering first US nuclear strikes back in the Cold War, if senior government official of the United States just saying those words publicly would have been justification for an all out nuclear strike on Russia's part because those kinds of words are fighting words in this nuclear world that we live in. Now, what should we make of this? I really feel like the understanding that I grew up with I'm 56. And I'm definitely at the very end of the Cold War era. People younger than me don't remember any of this stuff. But what we learned is it doesn't matter whether Putin is a good guy or a bad guy, and it doesn't matter how bad of a horrible thing he did.
The point is, he's got a button that can terminate humanity on earth if he wants to. According to Dr. Pippa Malmgren, he has probably already installed a deadman switch to make sure that if he is assassinated in a coup, that that World War III nuclear escalation will probably begin automatically, with those kinds of threats. What Pippa Malmgren said, and what I agree emphatically with is we cannot afford escalation. It doesn't matter how wrong they are, how horrible the atrocities are, it doesn't matter. Because if we try to say, we're not gonna let you do this, and it escalates to nuclear conflict, everybody dies, that's Mutual Assured Destruction. My generation was brought up understanding that it doesn't matter. If we don't agree, we have to accept that they've got the ability to end humanity, we can't mess with these people. Seems to me, like all of the sudden, our political elite are ready to mess with Russia, and it scares the hell out of me.
Mike: Well, so like many things, I think there was an element of confusion that kicks in here. Right. So first of all, the senator, I believe you're talking about is I think it's Wicker is the senator who brought that up, yea Roger Wicker, and that that was back in December of 21. It's hard to believe that we brought it up first, right. And then following the invasion of Ukraine, Putin put his nuclear forces on effectively, you know, status so that if he presses the button, which obviously isn't quite a button, there is no questioning about it, right. It's not a vote. This is what we're going to do. And I agree with you, I think that, you know, we are very much poking the bear. And I'm not referring to Russia per se as the bear in his characterization, but more in terms of saying, we can do whatever we want, you know, we can openly ship arms into Ukraine, we can openly have US advisors, you know, the classic air quote advisors that are facilitating the Ukrainian response. This is very dangerous territory, very very dangerous territory. And I think Pippa describes it quite well that Putin is basically waiting for us to step over the line, so that he can punch as hard as he possibly can, because he's not going to get another shot right? This is his decision that he's gonna go.
You know, it is a frightening environment. We are dealing with a country that most people don't realize how existential the risk is for Russia, as it faces demographic deterioration, as it faces growing powers on its borders, the advance of NATO, as well as the growth of China, which ultimately represents significant risk to Russia on its eastern front. You know, this is a country that feels cornered. And I'm not suggesting that that means that we have to tolerate bad behavior or that we should encourage bad behavior. But the simple reality is that real politic has always dominated the world, right? It's not a question of good versus evil. It's a question of what lives do we want to place at risk? And you're 100% Correct, that it feels like we're being bizarrely cavalier about the risks that we are taking.
Erik: Somebody famous, I forget who said of Russia, I know lots and lots of tactics to coax that bear out of his cave. The problem is, once he's out, I don't know any tactic to get them back in. And I fear that we're already at that point. And I wonder if you agree with that, but if so, you know, this is a macro economics and investing show, we need to think about what this means in terms of economic trends that our professional audience can invest in, is we hopefully don't approach any kind of nuclear war. So it's not about rubber for tires this time. What's it about?
Mike: Well, there is an element of it's about rubber for tires, right? Because Russia have produced not, not Russia in terms of rubber, but Russia produces an awful lot of oil that goes into the production of tires, as do others, right. And so we are broadly talking about the same sort of shortages that emerge, and that does become a critical component, right? That is part of the huge reason why Japan advanced on places like Malaysia, etc. Because they wanted access to what at the time were the only real sources of rubber, which was natural rubber plants, you know, the development of synthetic rubber in the course of the war was a critical innovation that really helped the United States. And I would argue we're going to see the exact same sorts of things, right. So we're currently seeing the dynamics of a world that is being fractured, where China is not shipping us stuff that's contributing to a need to invest in the same way that you invest in a war effort right. So we're being forced to put ourselves somewhat on war footing. Do we start to bring semiconductor production home? Do we start to bring chemical production home? Do we bring rare earths production home? And all of those require higher prices in order to create the operating umbrella, the profitability umbrella that allows the development of those resources in regions that you would otherwise choose not to develop them right?
So rare earths are a perfect example. The term rare earths implies that there's something unusual or rare about these. But the key is, is when you say rare earths, what you're actually talking about is slightly less common dirt right? It's none of these things are quote unquote, truly rare, like a precious metal, they're just relatively uncommon. And therefore you have to dig up a whole bunch of dirt and produce a whole bunch of byproduct waste in order to get the products that you want. China has been uniquely willing to engage in that type of pollution. We're gonna have to see that change. Right. We are also seeing on the economic front. And this is, I think, the much more relevant component, we're seeing a return to, you know, I know Zoltan Pozsar talks about, you know, the Bretton Woods three dynamic ending and the move towards a bank core type commodity currency. And I see the exact opposite. I see this actually as returning effectively to the reality of Bretton Woods one, which was not a US dollar standard for the world, but a US dollar standard for a subset of the world for that fraction of the world that chose to engage with capitalism in the West or play puppet states in aligning with the West. They were on a dollar standard. The rest of the world was on a ruble standard. Do I think that we go back to a ruble standard, highly unlikely. Do I think that Russia and China are working as rapidly and as hard as they possibly can to introduce alternatives to the SWIFT type system that allows continued trade with those entities without having to go through the messaging based permissioning system of the US-dominated SWIFT system? 100% and do cryptocurrencies and digital currencies play a critical role in that? I don't think there's any question about it.
Erik: Let's go back to the energy aspects of this. You know, just in the course of our recording this conversation on Wednesday afternoon, a tweet went by, from Dr. Anas Alhajji where he says here, we do have the ability to source the grades of oil that we need without Russia. We could eliminate Russia but the problem is, we don't have the capacity in terms of quantity to replace the amount of oil that Russia produces. Now, I find this really striking because first of all, Dr. Anas Alhajji is Mr. Crude Quality Matters. He's constantly talking about how quality matters more than quantity. And specifically, he's really good buddies personally, with the senior policymakers in Saudi Arabia. What honest I think is telling us here is really important signal if a guy who's that close with the Saudis, is kind of hinting that the Saudis don't really have the spare capacity to ramp up to replace Russia's production. I say you want to believe him and believe him now. So I think we got a real problem that most of the market doesn't understand, which is they're saying, okay, the EU is about to impose this sanction against Russia. So we've got to calculate the economic impact of that on the price of oil. My argument is, forget about that. That's chicken shit. Start thinking about what happens when Russia makes it a tactic of war to intentionally take action to try to deny access to crude oil to the west and does everything militarily that they can in order to ferment that outcome. What would that world look like and how big of a deal is it?
Mike: Well, so first of all, I don't disagree with a Anas and I would emphasize that his focus on the quality and different crude grades is one that feels like it's being missed broadly by politicians who are doing things like releasing from the SPR, etc. Right. You know, refining operations are extraordinarily complex chemical factories and the manner in which they are designed to be run is, you know, just imagine Breaking Bad, right and Walter White producing blue methamphetamine. It's extraordinarily dependent on the inputs and the process that you use for managing it. And I think that's broadly one of the things that people are missing, right. So whether we can talk about Venezuelan crude replacing various forms of the high sulfur content that is needed. You know, those are all things that I think can happen, but it takes time and it takes effort. Can you reconfigure those complex chemical factories so they run more efficiently than they currently do on things like West Texas Intermediate, or the sweet Crudes? Of course, but it takes time. And time is one of the things that you don't have a lot of in the world is fighting through the sort of inflationary dynamics or the high prices that have emerged in the aftermath of restarting the world from Coronavirus.
That's a world that looks like higher oil prices, right. And higher oil prices do two things. One, they eventually spur a supply response. And two, they spur innovations in terms of how to use oil more efficiently. So if oil is $10 a barrel or negative $37 a barrel, you behave very differently in your conservation efforts than you do If oil is at $185 a barrel. This I've seen floated around in the aftermath of Europe talking about banning Russian crude, you know, we can't know the answer. Because ultimately, those prices are set at an intersection of supply and demand, we can talk a lot about the supply side, we can develop some comfort that the quantity of barrels are there. We have less certainty around the demand side of the equation, particularly with uncertainty around what's really happening with Chinese demand. And then I would toss out one last component though, which is when you get to the edge of production levels, technically, yes, we can replace them. But then you become extremely fragile in terms of your response to unfortunate events. For example, what's happening in Libya right now where there's been a flare up in the civil crisis. And that is effectively shutting down production at the worst possible time for the world, right? That happens when resources go up in value. There's continually a competition for control of these resources and exactly like dirt, you know, rare earths. Most resources come from places in the world where people don't really want to live. Right? it's, you know, somewhat of a tautology, that there's not high demand for condos, you know, hanging out on the edge of copper mines, or oil fields.
And so you're looking at a situation in which the world is just becoming more fragile, at the same time that we rely more on that next incremental barrel that is being produced and that just produces high in elasticity, which means prices become exceptionally volatile. And that volatility, you know, is very similar to a another increase in price. I don't have a direct relationship that I could point you to. But I would be willing to strongly hypothesize that oil stable at $100 is actually far less damaging than oil that vacillates wildly between $50 and $150. In other words, the incentive to figure out how to replace that oil rises as the volatility rises, replace meaning substitute and eliminate it from the process.
Erik: Let's talk about why the rest of the world doesn't seem to see things the way you and I do Mike because I think you and I agree this is a really big issue but when I hear things like not just the Biden administration, but a lot of people that I really respect in the oil industry calling for even greater SPR releases to help address the cost of gasoline at the pump and so forth. These are professionals who understand this stuff who are advocating for what to me is akin to okay look I got the binoculars out I can see there is a confirmed tidal wave on the horizon headed for our beach. Let's cancel our flood insurance and use the premium to you know, buy Cracker Jacks with so we got something to watch with popcorn when the wave comes in. Why in the world when you have this geopolitical risk would you be emptying your SPR instead of topping it off at any price? And why is it that most of the oil industry doesn't see that risk and actually agrees with the Biden administration that it's a good time to be selling off the SPR as we're doing this week with a bunch of oil coming out of the SPR for the sake of bringing prices down? What about the national security risk of we were supposed to keep that oil for a rainy day? Well, we couldn't get any more.
Mike: Well, so there's a part of it and you know oil probably better than I do by a reasonable margin. But there is an element of the SPR was particularly important in an environment in which the US was a major importer of oil. It becomes less important when we're a net exporter in part because the grades of oil that we have in the SPR are not particularly well suited for a lot of the refining operations that we have in the United States, which is, you know, part of the great irony, right, we pump our own oil in, and then we keep a mix that is not particularly useful in terms of our own demand. So, I'm a little bit less concerned about the SPR releases than I think most are. But I do think that you're correct that, you know, this is part and parcel of a broadly reactionary firefighting type dynamic within this administration. And hopefully, it was clear, I don't think there were the Republican administration under Trump was any better, right? We've become extraordinarily short term focused of, you know, oh, gosh, there's a problem. Let's you know, douse it with as much water and fire extinguishers as possible without necessarily paying attention to, you know, well, is there actually an arsonist and should we focus on capturing the arsonists rather than continually putting out these tiny fires? We're not doing a good job of dealing with the arson, you know, the arsonist risk we're busy putting out as fires.
Erik: Let's talk beyond energy and other commodities. And where the the World War III related demand and trends are going to come from. What is this going to mean, in terms of broader commodities certainly, in the case of grains and food. A lot of people are speculating that food shortages are going to be part of a World War III scenario. Is that true and what else should we be thinking about?
Mike: Well, again, you know, when you talk about food shortages, the people who suffer from food shortages are those who are on the edge anyway, right? So the United States is not on the edge, right, you may have to deal with the dynamics of you can't get your favorite flavor of Twinkie. And we may be faced with the unfortunate circumstance in which Oreos reduces the 27 varieties they now seem to have on the shelf to three varieties. We go back to you know, double stuffed and regular, but we're not facing true deprivation in the United States. There will unquestionably be an increase in and there has been an increase in food stressed households, children, etc. But we'll have the mechanisms available to allocate those resources and make sure that people in the United States get fed. The real risk in things like foodstuffs emerges in countries that have historically been able to rely on a stable system to import a sizeable fraction of their food while exporting using their land export cash crops.
So Egypt, for example, exporting cotton, while importing wheat and corn is a significant example of that, right? They will be forced to reduce their cash crop production, in order to inefficiently produce food to improve their security. That means the world faces an aggregate shortfall of sauce, that is then only exacerbated by the dynamics of fertilizer shortages, etc. And again, fertilizer shortages are one of these weird things where if it were to happen slowly, you know, soil can recover, and you can reduce dependence on fertilizer, but you can't just cut it off, right? Because the beneficial bacteria etc, have been wiped out, by the way that we have largely farmed this stuff. We're looking at a very real shortage here. And it's going to hit the developing world far far worse then it's going to hit us. Again I think we'll have reduced choice and higher expenses. But that's a totally different environment than you can't get food on the table, which is going to happen around the world.
Erik: Let's talk about what this means for the stock market. Because it seems to me and you're talking World War III. Those are pretty big, strong words. Dr. Pippa Malmgren says, World War III already began, the stock markets down like 4% or so in the news. Seems to me like we're not exactly in a panic here.
Mike: I gotta be honest with you, that feels nuclear to me, 4%. My God, how are people handling these losses? Now look I there's a lot of ways I can paint a picture for you that this turns into a positive outcome, right. So traditionally, you're supposed to buy when the bullets fly. Nowhere was that more true than March 2020. Right. And you know, if you think back in that context, it becomes somewhat ironic. But we are absolutely looking at a situation where the US could re-shore a significant fraction of productive capacity leading to significant increases in wages. And we're broadly seeing that at the same time that we're seeing things like California just announced a significant expansion of retirement programs, such that any employer that that has more than five employees, is now in a situation where they have to offer a 401k, right. So we're not seeing any sign of deterioration Chyna flows into markets, particularly through the passive vehicles, we are starting to see some signs that the active flows are beginning to turn down again. But this is one of the things you and I were talking about. I mean, the data on sentiment is unbelievably bad. Not only do I work with Simplify but I also have an investment in a firm called Tier One Alpha that is focused on a lot of the data in options and other stuff. And we're going through some of the charts that we're in the process of developing and I mean everything ranging from the fraction of the market that is down, you know, X percent, let's say 20, 30, 40, 50%, it's full on bear market levels, with the top line indices barely having retreated.
Erik: Let's talk more about that, because we've got, as you say, top line indices barely showing anything, but it's not like you'd have trouble finding a stock that's down more than 10%. There's lots of those. So it's almost like there's been a breath crash that nobody's really talking about.
Mike: Yeah so I think that's right. And I mean, if I look at, you know, I'll just highlight, if I look at a chart that does a better job of representing that type of breath. You know, the Russell 2000, broadly is now down, you know, over the past year has basically gone absolutely nowhere after an attempted breakout in the fourth quarter of 2021. But is, you know, that's an incredibly vulnerable looking chart, right, it looks an awful lot like what we had heading into the fourth quarter of 2015 for example, to a lesser extent, maybe the fourth quarter of 2018, where, you know, it had sold off below the 200 day and then was unable to retake it, those look a heck of a lot worse, as markets than I think that the headline would suggest. And so you know, my bias continues to be that there's going to be some form of move lower and pain associated with it. But if I look at the headlines, again, you know, I keep getting drawn back to the dynamic of what's going to cause the flows to change. And the only thing that really gets them to change in my analysis is if we see a meaningful change in employment, and we see a dramatic, you know, a meaningful reduction where people start to get fired. It feels like that's coming.
We've seen the yield, curve, invert, you know, there's all sorts of dynamics around that. But it hasn't happened yet. And a lot of people are very focused on that recession, that dynamic that oh, the yield curve inverted. There's also some irony around that, right. Somebody posted the other day that, you know, the number of people who posted on the yield curve inverting was, you know, off the charts, and the number of people who posted when it began to steepen again was very low. Well, part of the reason for that is, is that, you know, we only care that indicated that a recession is coming. Right? It will steepen out of it, we'll see the yield curve normalize, everyone's gonna forget aspects of this. And then we'll see if we actually get that recession. And if that recession occurs, then I expect the flows to deteriorate. And that's, that's what I'm very focused on right now is, do we see the economy really meaningfully turn lower? Do we see employment weakened and there's a lot of reasons as we were talking about it, when you talk about reshoring, and bringing stuff back on why that could behave differently this time.
It seems to me that sentiment test to be a really big piece of this because frankly, as I look at this whole situation, I don't feel like most people are getting it. I don't think that the general society around me understands that we are sparring with some awfully dangerous words with nuclear superpowers. Is there a moment where kind of the whole world wakes up and says, holy cow, this World War III thing actually has some reality to it, it's time to panic? Is it the question of they haven't panicked yet and that's coming? Or why is it that you and I both see the world in a really scary place, but most people don't seem to be too concerned?
I mean, this is the same answer you hear me give to a bunch of stuff, right? I mean, whose target date fund that captures 85% of the retirement flows that are now coming in? I don't know a single target date fund that has like a checkbox for, you know, pause investments upon threat of World War III. I just like I think that's part of the reason why we see the disconnect between flows and sentiment. Individual investors who answer questions like the AAII, they're inevitably focused on the stocks that they've selected in their portfolio. But in the greater scheme of things, they're increasingly irrelevant versus the overall flow that goes into vehicles like Vanguard and BlackRock. You know, so I agree with you. I think the sentiment is the most interesting thing that's out there. The disconnect between sentiment and price levels, but the risk is that that sentiment reflects the professional investor class. It reflects those who can make somewhat discretionary choices, those who can respond to the higher realized levels of volatility that we've been experiencing for the past year or so. And all of those contribute to effectively selling out of the active and discretionary community, while the passive community effectively HODLs and accumulates, and if, you know, sentiment turns, right, so let's just imagine for a second that sentiment turns, Russia decides to embrace the West. China recognizes the error of its ways we come together in a giant Kumbaya, and we print a trillion dollars just to celebrate the unification Who are you going to buy those shares from when you decide to get bullish again?
I mean, Vanguard is not going to sell them to you. Blackrock is not going to sell them to you. The T Rowe target date funds not going to sell it to you. So the only solution is you find other now bullish investors to sell it to you. And guess what, that's what happened in March 2020 through give or take, you know, February of 2021. So, you know, it scares the hell out of me to sit there and say on the eve of, you know, or as we're involved in World War III, that like, this still feels that there is the potential for an extraordinary bullish move here. But I get very concerned when I hear all the discretionary people telling me the same thing and how depressed they are. And you know, that this is the clearest, negative setup in history. Unless somebody tells Vanguard, and they change their policies, I struggle to see how it becomes all that meaningful.
Erik: Well, Mike, I can't thank you enough for another terrific interview. But before I let you go, please give our listeners a quick rundown of what you guys do at Simplify Asset Management.
Mike: So Simplify is an ETF firm. We launched in September 2020. And our unique approach is to take traditional exposures. So for example, US equities, large cap, and then apply derivative overlays, which is really kind of my area of expertise and experience, that allow us to modify that payout, either improving downside performance, improving upside performance, generating additional yield, etc. And we do that across US equities. We've recently introduced credit products that are designed to hedge against credit events. We have an interest rate hedge product that is doing extraordinarily well in an environment in which interest rates have been rising. We didn't talk much about the Fed, for example. And we also have introduced, you know, the first managed, you know, the first managed futures strategies in ETF form that are capable of being rebalanced at the frequency that you usually want to think about managed futures. And so, you know, we try to be a very technologically progressive and fast forward ETF firm in terms of incorporating unique strategies that are capable of delivering unique payout features to the retail and registered investment advisor markets.
Erik: Well, I look forward to getting you back on the show for an update on World War III and other subjects. Patrick's Ceresna and I will be back as MacroVoices continues right after this message from our sponsor.